Assurant 2013 Annual Report Download - page 49

ASSURANT, INC. – 2013 Form 10-K 37
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
and market conditions. The fair market value generally
increases or decreases in an inverse relationship with
fl uctuations in interest rates, while net investment income
realized by us from future investments in fi xed maturity
securities will generally increase or decrease with interest
rates. We also have investments that carry pre-payment
risk, such as mortgage-backed and asset-backed securities.
Interest rate fl uctuations may cause actual net investment
income and/or cash fl ows from such investments to differ
from estimates made at the time of investment. In periods
of declining interest rates, mortgage prepayments generally
increase and mortgage-backed securities, commercial
mortgage obligations and bonds are more likely to be
prepaid or redeemed as borrowers seek to borrow at lower
interest rates. Therefore, in these circumstances we may be
required to reinvest those funds in lower-interest earning
investments.
Expenses
Our expenses are primarily policyholder benefi ts, underwriting,
general and administrative expenses and interest expense.
Policyholder benefi ts are affected by our claims management
programs, reinsurance coverage, contractual terms and
conditions, regulatory requirements, economic conditions, and
numerous other factors. Benefi ts paid or reserves required for
future benefi ts could substantially exceed our expectations,
causing a material adverse effect on our business, results of
operations and fi nancial condition.
Underwriting, general and administrative expenses consist
primarily of commissions, premium taxes, licenses, fees,
amortization of deferred costs, general operating expenses
and income taxes.
We incur interest expense related to our debt.
Critical Accounting Estimates
Certain items in our consolidated fi nancial statements are
based on estimates and judgment. Differences between
actual results and these estimates could in some cases have
material impacts on our consolidated fi nancial statements.
The following critical accounting policies require signifi cant
estimates. The actual amounts realized in these areas could
ultimately be materially different from the amounts currently
provided for in our consolidated fi nancial statements.
Health Insurance Premium Rebate Liability
The Affordable Care Act was signed into law in March 2010.
One provision of the Affordable Care Act, effective January 1,
2011, established a minimum medical loss ratio (“MLR”)
designed to ensure that a minimum percentage of premiums is
paid for clinical services or health care quality improvement
activities. The Affordable Care Act established an MLR of
80% for individual and small group business and 85% for
large group business. If the actual loss ratios, calculated in
a manner prescribed by the Department of Health and Human
Services (“HHS”), are less than the required MLR, premium
rebates are payable to the policyholders by August 1 of the
subsequent year.
The Assurant Health loss ratio reported in “Results of
Operations” below (the “GAAP loss ratio”) differs from the
loss ratio calculated under the MLR rules. The most signifi cant
differences include: the fact that the MLR is calculated
separately by state, legal entity and type of coverage
(individual or group); the MLR calculation includes credibility
adjustments for each state/entity/coverage cell, which are not
applicable to the GAAP loss ratio; the MLR calculation applies
only to some of our health insurance products, while the GAAP
loss ratio applies to the entire portfolio, including products
not governed by the Affordable Care Act; the MLR includes
quality improvement expenses, taxes and fees; changes in
reserves are treated differently in the MLR calculation; the
MLR premium rebate amounts are considered adjustments
to premiums for GAAP reporting whereas they are reported
as additions to incurred claims in the MLR rebate estimate
calculations; and the MLR is calculated using a rolling three
years of experience while the GAAP loss ratio represents
the current year only.
Assurant Health has estimated the 2013 impact of this
regulation based on defi nitions and calculation methodologies
outlined in the HHS regulations and guidance. The estimate
was based on separate projection models for individual
medical and small group business using projections of expected
premiums, claims, and enrollment by state, legal entity and
market for medical businesses subject to MLR requirements
for the MLR reporting year. In addition, the projection models
include quality improvement expenses, state assessments
and taxes.
Reserves
Reserves are established in accordance with GAAP using
generally accepted actuarial methods and refl ect judgments
about expected future claim payments. Calculations
incorporate assumptions about infl ation rates, the incidence
of incurred claims, the extent to which all claims have been
reported, future claims processing, lags and expenses and
future investment earnings, and numerous other factors.
While the methods of making such estimates and establishing
the related liabilities are periodically reviewed and updated,
the calculation of reserves is not an exact process.
Reserves do not represent precise calculations of expected
future claims, but instead represent our best estimates
at a point in time of the ultimate costs of settlement and
administration of a claim or group of claims, based upon
actuarial assumptions and projections using facts and
circumstances known at the time of calculation.